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Why are we still putting up with payroll tax? Australian businesses deserve better

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How often have we heard the cry from politicians ‘we are going to encourage business by removing red tape?’

When did you last hear a politician tell you with great fervour that ‘our Government is all about job creation?’

The recent decision of the Productivity Commission to reduce penalty loadings on wage rates for weekends has been hailed by many as a means to create more employment. But why is it then that the one tax that both creates red tape and is a huge cost to employers is rarely mentioned when there is talk of reductions in red tape and the creation of jobs? I speak, of the dreaded payroll tax.

Who can justify having Australian businesses pay over $22 billion annually in payroll tax to the individual States for the sole reason that they are employing people? On average, for every additional person a business employs it costs about $4,000 in payroll tax. In addition, it costs the federal Government over $6.5 billion in lost tax revenue each year given it is deductible against taxable income.

Why do Australian businesses loathe payroll tax?

It is not just the cost to employers that causes great loathing of this tax, it’s also very concerning that for those businesses who employ people in more than one State, this is a red tape nightmare for two reasons. Firstly, each State wants to capture as much payroll tax as it can. As a result, each State wants employees of businesses trading in more than one State to be captured as employees of their State.

Secondly, but just as bad is that the levy is different in every State. It is great to keep accountants employed but how much easier would it be if a company had only one rate to worry about (or none at all)!

For the 2016/17-year payroll tax is levied on wages, plus superannuation, plus fringe benefits as follows:

Deductible                    Rate Payable

    $000                              above deductible

Western Australia                850                                5.50%

South Australia                   600                                4.90%

Victoria                              575                                4.85%

Tasmania                            1,010                             6.10%

New South Wales                 750                               5.45%

Queensland                        1,100                             4.75%

Northern Territory               1,500                             5.50%

Australian Capital Territory  2,000                             6.50%

Businesses employing in more than one State are required to determine how much of the deductible can be utilised in each State based on the total wages paid across all States. The deduction available is reduced depending on the proportion of total wages that are paid in each of the States. Understandably this is not an easy calculation to make. Is it hard to follow? Of course it is.

And what about the impact on employment numbers?

According to the ABS 6202.0 report there were 738,900 unemployed people in Australia in February 2017. Full-time average earnings in Australia in November 2016 were $82,800 per year. It is not reasonable to expect that all monies currently being used to pay payroll tax would be diverted into employing additional staff. However, if it was, there would be an extra 265,700 full time jobs.

If 265,700 full time jobs were created and taken up the unemployment rate would be reduced by over one-third!

Of course there would be a revolt by State Treasurers if $22 billion of revenue was to be taken from them! How would they make up the shortfall?  But there is a solution. Just last year the South Australian Government urged the Federal Government to consider an increase in the rate of GST. This was dismissed out of hand by all the major players, in my opinion not for economic reasons but for political reasons.

Did they think “I might not be re-elected if I agree to an increase in the GST”? Perhaps they may have thought differently if the question was “what would be the impact on my re-election if I could promise a substantial reduction in unemployment?”

According to ABS Report 5506.0 the GST raises over $56 billion annually. An increase in the GST rate to 15% would raise more than enough to phase out payroll tax, and to increase the tax-free threshold for low income earners who would need to be compensated for the increase in GST. It should also be remembered that an increase in GST has no monetary impact on business as any GST paid by the business is fully recovered as an input credit.

It is accepted that removal of payroll tax would require agreement of all states and territories and that this would be difficult to achieve. But not impossible: just go back to John Howard’s agreement with the States when his Government originally introduced the GST.

Is it too much to ask our politicians to at least give this theory some consideration?

With more than 40 years’ experience in the accounting profession, Des Caulfield has extensive knowledge and understanding of the issues faced by businesses across a diverse array of industries and sectors. He has a particular interest and expertise in the family and privately owned business sector, consulting to a wide range of clients on issues such as taxation and estate planning, succession planning, family business constitutions, business sales and acquisitions.

Des Caulfield
Des Caulfield